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Published: Official Journal of the European Union (L 261, Volume 46, 13 October 2003)
INTERNATIONAL ACCOUNTING STANDARD IAS 16
IAS 16, accounting for property, plant and equipment, was approved in March 1982.
In December 1993, IAS 16 was revised as part of the project on Comparability and improvements of financial statements. It became IAS 16, property, plant and equipment (IAS 16 (revised 1993)).
In July 1997, when IAS 1, presentation of financial statements, was approved, paragraph 66(e) of IAS 16 (revised 1993) (now paragraph 60(e) of this Standard) was amended.
In April and July 1998, various paragraphs of IAS 16 (revised 1993) were revised to be consistent with IAS 22 (revised 1998), business combinations, IAS 36, impairment of assets, and IAS 37, provisions, contingent liabilities and contingent assets. The revised Standard (IAS 16 (revised 1998)) became operative for annual financial statements covering periods beginning on or after 1 July 1999.
In April 2000, paragraph 4 was amended by IAS 40, investment property. IAS 40 became operative for annual financial statements covering periods beginning on or after 1 January 2001.
In January 2001, paragraph 2 was amended by IAS 41, Agriculture. IAS 41 is operative for annual financial statements covering periods beginning on or after 1 January 2003.
The following SIC interpretations relate to IAS 16:
- SIC-14: property, plant and equipment - compensation for the impairment or loss of items.
- SIC-23: property, plant and equipment - major inspection or overhaul costs.
CONTENTS Paragraphs Objective
Scope 1-5
Definitions 6
Recognition of property, plant and equipment 7-13
Initial measurement of property, plant and equipment 14-22
Components of cost 15-20
Exchanges of assets 21-22
Subsequent expenditure 23-27
Measurement subsequent to initial Recognition 28-52
Benchmark treatment 28
Allowed alternative treatment 29-40
Revaluations 30-40
Depreciation 41-52
Review of useful life 49-51
Review of depreciation method 52
Recoverability of the carrying amount - impairment losses 53-54
Retirements and disposals 55-59
Disclosure 60-66
Effective date 67-68
The standards, which have been set in bold italic type, should be read in the context of the background material and implementation guidance in this Standard, and in the context of the 'Preface to International Accounting Standards'. International Accounting Standards are not intended to apply to immaterial items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment. The principal issues in accounting for property, plant and equipment are the timing of recognition of the assets, the determination of their carrying amounts and the depreciation charges to be recognised in relation to them.
This Standard requires an item of property, plant and equipment to be recognised as an asset when it satisfies the definition and recognition criteria for an asset in the framework for the preparation and presentation of financial statements.
SCOPE
1. This Standard should be applied in accounting for property, plant and equipment except when another International Accounting Standard requires or permits a different accounting treatment.
2. This Standard does not apply to:
(a) biological assets related to agricultural activity (see IAS 41, agriculture); and
(b) mineral rights, the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.
However, this Standard does apply to property, plant and equipment used to develop or maintain the activities or assets covered in (a) or (b) but separable from those activities or assets.
3. In some circumstances International Accounting Standards permit the initial recognition of the carrying amount of property, plant and equipment to be determined using an approach different from that prescribed in this Standard. For example, IAS 22 (revised 1998), business combinations, requires property, plant and equipment acquired in a business combination to be measured initially at fair value even when it exceeds cost. However, in such cases all other aspects of the accounting treatment for these assets, including depreciation, are determined by the requirements of this Standard.
4. An enterprise applies IAS 40, investment property, rather than this Standard to its investment property. An enterprise applies this Standard to property being constructed or developed for future use as investment property. Once the construction or development is complete, the enterprise applies IAS 40. IAS 40 also applies to existing investment property that is being redeveloped for continued future use as investment property.
5. This Standard does not deal with certain aspects of the application of a comprehensive system reflecting the effects of changing prices (see IAS 15, information reflecting the effects of changing prices, and IAS 29, financial reporting inhyperinflationary economies). However, enterprises applying such a system are required to comply with all aspects of this Standard, except for those that deal with the measurement of property, plant and equipment subsequent to its initial recognition.
DEFINITIONS
6. The following terms are used in this Standard with the meanings specified:
Property, plant and equipment are tangible assets that:
(a) are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.
Useful life is either:
(a) the period of time over which an asset is expected to be used by the enterprise; or
(b) the number of production or similar units expected to be obtained from the asset by the enterprise.
Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction.
Residual value is the net amount which the enterprise expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation and accumulated impairment losses thereon.
RECOGNITION OF PROPERTY, PLANT AND EQUIPMENT
7. An item of property, plant and equipment should be recognised as an asset when:
(a) it is probable that future economic benefits associated with the asset will flow to the enterprise; and
(b) the cost of the asset to the enterprise can be measured reliably.
8. Property, plant and equipment is often a major portion of the total assets of an enterprise, and therefore is significant in the presentation of its financial position. Furthermore, the determination of whether an expenditure represents an asset or an expense can have a significant effect on an enterprise's reported results of operations.
9. In determining whether an item satisfies the first criterion for recognition, an enterprise needs to assess the degree of certainty attaching to the flow of future economic benefits on the basis of the available evidence at the time of initial recognition. Existence of sufficient certainty that the future economic benefits will flow to the enterprise necessitates an assurance that the enterprise will receive the rewards attaching to the asset and will undertake the associated risks. This assurance is usually only available when the risks and rewards have passed to the enterprise. Before this occurs, the transaction to acquire the asset can usually be cancelled without significant penalty and, therefore, the asset is not recognised.
10. The second criterion for recognition is usually readily satisfied because the exchange transaction evidencing the purchase of the asset identifies its cost. In the case of a self-constructed asset, a reliable measurement of the cost can be made from the transactions with parties external to the enterprise for the acquisition of the materials, labour and other inputs used during the construction process.
11. In identifying what constitutes a separate item of property, plant and equipment, judgement is required in applying the criteria in the definition to specific circumstances or specific types of enterprises. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value. Most spare parts and servicing equipment are usually carried as inventory and recognised as an expense as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when the enterprise expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment and their use is expected to be irregular, they are accounted for as property, plant and equipment and are depreciated over a time period not exceeding the useful life of the related asset.
12. In certain circumstances, it is appropriate to allocate the total expenditure on an asset to its component parts and account for each component separately. This is the case when the component assets have different useful lives or provide benefits to the enterprise in a different pattern thus necessitating use of different depreciation rates and methods. For example, an aircraft and its engines need to be treated as separate depreciable assets if they have different useful lives.
13. Property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, while not directly increasing the future economic benefits of any particular existing item of property, plant and equipment may be necessary in order for the enterprise to obtain the future economic benefits from its other assets. When this is the case, such acquisitions of property, plant and equipment qualify for recognition as assets, in that they enable future economic benefits from related assets to be derived by the enterprise in excess of what it could derive if they had not been acquired. However, such assets are only recognised to the extent that the resulting carrying amount of such an asset and related assets does not exceed the total recoverable amount of that asset and its related assets. For example, a chemical manufacturer may have to install certain new chemical handling processes in order to comply with environmental requirements on the production and storage of dangerous chemicals; related plant enhancements are recognised as an asset to the extent they are recoverable because, without them, the enterprise is unable to manufacture and sell chemicals.
INITIAL MEASUREMENT OF PROPERTY, PLANT AND EQUIPMENT
14. An item of property, plant and equipment which qualifies for recognition as an asset should initially be measured at its cost.
Components of cost
15. The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, and any directly attributable costs of bringing the asset to working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:
(a) the cost of site preparation;
(b) initial delivery and handling costs;
(c) installation costs;
(d) professional fees such as for architects and engineers; and
(e) the estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is recognised as a provision under IAS 37, provisions, contingent liabilities and contingent assets.
16. When payment for an item of property, plant and equipment is deferred beyond normal credit terms, its cost is the cash price equivalent; the difference between this amount and the total payments is recognised as interest expense over the period of credit unless it is capitalised in accordance with the allowed alternative treatment in IAS 23, borrowing costs.
17. Administration and other general overhead costs are not a component of the cost of property, plant and equipment unless they can be directly attributed to the acquisition of the asset or bringing the asset to its working condition. Similarly, start-up and similar pre-production costs do not form part of the cost of an asset unless they are necessary to bring the asset to its working condition. Initial operating losses incurred prior to an asset achieving planned performance are recognised as an expense.
18. The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If an enterprise makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of producing the assets for sale (see IAS 2, inventories). Therefore, any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred in the production of a self-constructed asset is not included in the cost of the asset. IAS 23 establishes criteria which need to be satisfied before interest costs can be recognised as a component of property, plant and equipment cost.
19. The cost of an asset held by a lessee under a finance lease is determined using the principles set out in IAS 17, leases.
20. The carrying amount of property, plant and equipment may be reduced by applicable government grants in accordance with IAS 20, accounting for government grants and disclosure of government assistance.
Exchanges of assets
21. An item of property, plant and equipment may be acquired in exchange or part exchange for a dissimilar item of property, plant and equipment or other asset. The cost of such an item is measured at the fair value of the asset received, which is equivalent to the fair value of the asset given up adjusted by the amount of any cash or cash equivalents transferred.
22. An item of property, plant and equipment may be acquired in exchange for a similar asset that has a similar use in the same line of business and which has a similar fair value. An item of property, plant and equipment may also be sold in exchange for an equity interest in a similar asset. In both cases, since the earnings process is incomplete, no gain or loss is recognised on the transaction. Instead, the cost of the new asset is the carrying amount of the asset given up. However, the fair value of the asset received may provide evidence of an impairment in the asset given up. Under these circumstances the asset given up is written down and this written down value assigned to the new asset. Examples of exchanges of similar assets include the exchange of aircraft, hotels, service stations and other real estate properties. If other assets such as cash are included as part of the exchange transaction this may indicate that the items exchanged do not have a similar value.
SUBSEQUENT EXPENDITURE
23. Subsequent expenditure relating to an item of property, plant and equipment that has already been recognised should be added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the enterprise. All other subsequent expenditure should be recognised as an expense in the period in which it is incurred.
24. Subsequent expenditure on property plant and equipment is only recognised as an asset when the expenditure improves the condition of the asset beyond its originally assessed standard of performance. Examples of improvements which result in increased future economic benefits include:
(a) modification of an item of plant to extend its useful life, including an increase in its capacity;
(b) upgrading machine parts to achieve a substantial improvement in the quality of output; and
(c) adoption of new production processes enabling a substantial reduction in previously assessed operating costs.
25. Expenditure on repairs or maintenance of property, plant and equipment is made to restore or maintain the future economic benefits that an enterprise can expect from the originally assessed standard of performance of the asset. As such, it is usually recognised as an expense when incurred. For example, the cost of servicing or overhauling plant and equipment is usually an expense since it restores, rather than increases, the originally assessed standard of performance.
26. The appropriate accounting treatment for expenditure incurred subsequent to the acquisition of an item of property, plant and equipment depends on the circumstances which were taken into account on the initial measurement and recognition of the related item of property, plant and equipment and whether the subsequent expenditure is recoverable. For instance, when the carrying amount of the item of property, plant and equipment already takes into account a loss in economic benefits, the subsequent expenditure to restore the future economic benefits expected from the asset is capitalised provided that the carrying amount does not exceed the recoverable amount of the asset. This is also the case when the purchase price of an asset already reflects the enterprise's obligation to incur expenditure in the future which is necessary to bring the asset to its working condition. An example of this might be the acquisition of a building requiring renovation. In such circumstances, the subsequent expenditure is added to the carrying amount of the asset to the extent that it can be recovered from future use of the asset.
27. Major components of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of usage or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. The components are accounted for as separate assets because they have useful lives different from those of the items of property, plant and equipment to which they relate. Therefore, provided the recognition criteria in paragraph 7 are satisfied, the expenditure incurred in replacing or renewing the component is accounted for as the acquisition of a separate asset and the replaced asset is written off.
MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION
Benchmark treatment
28. Subsequent to initial recognition as an asset, an item of property, plant and equipment should be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
Allowed alternative treatment
29. Subsequent to initial recognition as an asset, an item of property, plant and equipment should be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations should be made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.
Revaluations
30. The fair value of land and buildings is usually its market value. This value is determined by appraisal normally undertaken by professionally qualified valuers.
31. The fair value of items of plant and equipment is usually their market value determined by appraisal. When there is no evidence of market value because of the specialised nature of the plant and equipment and because these items are rarely sold, except as part of a continuing business, they are valued at their depreciated replacement cost.
32. The frequency of revaluations depends upon the movements in the fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. Some items of property, plant and equipment may experience significant and volatile movements in fair value thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant movements in fair value. Instead, revaluation every three or five years may be sufficient.
33. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is either:
(a) restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued
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